The debt ceiling stand-off is set to go down to the wire with the Coalition to appeal to the Greens one last time to increase the limit from $300 billion to $500 billion when the Senate resumes in two weeks.

As economists expressed exasperation at the growing political brinkmanship, which the Coalition was trying to link to last month’s United States debt crisis, including a possible shutdown of government services, no one budged.

In a tumultuous day in Parliament, the Greens and Labor combined in the Senate to halve the desired increase and allow a $400 billion ceiling.

The legislation returned to the Lower House where, after more robust debate, the government used its numbers to strike out the changes.

When the Senate resumes on December 2, the government will present it again with the legislation seeking a $500 billion ceiling.

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After Greens leader
Christine Milne
told The Australian Financial Review she could change her mind if Treasury presented her with a compelling argument in the interim for a $500 billion ceiling, the government’s hopes were raised.

Government sources said it was now counting on the Greens backing down after Treasury secretary Martin ­Parkinson appeared before a Senate estimates hearing on Wednesday, and Finance Department secretary David Tune appeared on Tuesday.

If not, Treasurer
Joe Hockey
would have to accept a $400 billion ceiling and seek a further extension closer to the federal election.

Labor and the Greens argued that on the most recent published economic data, debt would breach the current $300 billion cap on December 12 and peak at $370 billion in 2016.

If the government needed an increase beyond $400 billion to $500 billion at a later date, it should come back to Parliament and make a case for it.

This would make a political problem for the government down the track. “This government was elected to reduce the deficit," shadow treasurer Chris Bowen said.

“The Australian people are getting a very different government to the one they were promised."

Hockey threatens shutdown

Mr Hockey threatened to slash harder than anticipated in the May budget if left with a $400 billion ceiling. He has raised the spectre of shutting down government services as happened in the US.

Mr Hockey said the starting point remains Treasury’s Pre-Election Economic and Fiscal Outlook, which predicts government borrowings will hit $370 billion in 2015-16.

Another $20 billion would need to be borrowed to cover the impact of Labor’s refusal to scrap the mining tax package and the Clean Energy Finance Corporate, Mr Hockey said.

Another $8.8 billion has been ­borrowed by the Coalition to restock the Reserve Bank of Australia’s financial reserves.

The Treasurer is refusing to release the Mid-Year Budget Update (MYEFO) until after Parliament rises for the year but he confirmed the most recently-published economic data was obsolete.

Mr Hockey pointed out that last week the RBA had reduced its growth forecasts for the coming year and the debt situation was more urgent.

“Growth figures for next year are being downgraded, which will have a negative impact on revenues, which will have a negative impact on the budget," he said.

“You will find that $500 billion is the appropriate level to deal with the legacy of Labor’s debt," Mr Hockey told Parliament.

The government has offered Labor a secret briefing on MYEFO’s numbers to make its case.

Mr Bowen said, “we don’t need a secret briefing . . . We need them to be up-front with all the Australian people.’’

He said the offer of a secret briefing proved Treasury had new numbers and they should be released for all to see.

$400bn debt limit ‘stupid policy: Deloitte

Deloitte Access Economics budget expert Chris Richardson said the Senate’s attempt to impose a $400 billion debt limit was “stupid policy" and an unnecessary constraint on the government. While the Coalition could potentially keep the budget below that ceiling, depending on the size of its cuts, much would depend on revenue from the commodity export cycle.

“Some of these things are in the control of the government and some aren’t," he said.

“If you insist on a $400 billion line in the sand, then we are as a nation taking a completely unnecessary punt on the state of the Chinese economy and iron ore prices – and no textbook says that’s smart."

Barclays economist Kieran Davies predicts the deficit is currently on track to hit $50 billion – or 3.2 per cent of gross domestic product – in 2013-14, well above the $30 billion foreshadowed in PEFO. Mr Davies said a return to surplus in 2016-17 – which Prime Minister Tony Abbott has targeted – no longer seems likely.

“There has been a significant deterioration in the underlying budget position," Mr Davies said, citing Finance Department tracking figures for the first three months of the fiscal year.

“Revenue remains subdued, while spending has picked up strongly, ­something that may reflect the previous government’s attempt to achieve its unrealistic goal of achieving a surplus in 2012-13" by shuffling spending from earlier years.

The worsening outlook increases the government’s need to ramp up its borrowing in coming years as the return to surplus is pushed further into the future.

Bond market experts estimate that the Australia Office of Financial Management – the government’s debt seller – will need to issue around $70 billion a year for the next three years.

By comparison, in 2008, the entire commonwealth government bond market amounted to just $50 billion.

Grattan Institute director John Daley said a limit of $400 billion would only be enough if the government took “substantial action" by May on repairing the budget. “Implicitly that means taking some tough decisions, and tough decisions are clearly needed."